Farm Sector Income & Finances 2016 Outlook. By Ryan Kuhns and Kevin Patrick March 16, 2016

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1 Farm Sector Income & Finances 2016 Outlook By Ryan Kuhns and Kevin Patrick March 16, 2016

2 Background The Economic Research Service forecasts the farm sector s income statement and balance sheet Last released February 9 th Includes 2015 and 2016 forecasts of: Income statement Balance sheet Financial metrics Farm business-level outlook 2

3 Net cash income (NCI) forecast down 2.5% in

4 Crop receipts drive the expected decline in NCI from 2013 to

5 2016F crop receipts significantly lower than 2013, but flat from

6 Animal receipts are also expected to fall for most categories in

7 $ billion 14 Government payments are forecast to rise over 30 percent in F 2016F F= Forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics using FSA, NRCS, and CCC data. Data as of February 9,

8 $ billion 14 Government payments based on price are a larger share in F 2016F F= Forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics using FSA, NRCS, and CCC data. Data as of February 9, Fixed payments Crop price based payments All other payments PLC, ARC, ACRE, counter-cyclical payments, and other programs where payments vary with market prices. Fixed direct payments and cotton transition payments. Disaster relief payments, tobacco transition payments, dairy program payments, and conservation payments. 8

9 Cash expenses are expected to decline for the second consecutive year $ Billion F 2016F F = forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9,

10 $ billion 60 Feed, fuel, fertilizer, and livestock expenses drive decline in Decreased Increased Feed Livestock & poultry Fertilizer Fuels & Oils Pesticides Labor Net rent Seeds Interest Property taxes/fees F = forecast 2014F Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9, F 2015F 2016F 10

11 Since our first 2015 forecast the outlook for crop receipts improved, and animal and product receipts declined net cash income forecast increased $3.8 billion from February 2015 to February 2016 Net cash income 2015F Crop receipts Animals and products receipts Cash farmrelated income Production Expenses All figures are in $ Billion 2014F Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9, Government Payments 2015F Net cash income 2015F 11

12 Improvement in 2015 crop receipt forecasts largely due to fruits/nuts $ billion Corn Soybeans Feed, food, & oil crops* F= Forecast. * Excluding corn and soybeans. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9, Fruits & nuts 2014F Vegetables & melons 2015F Cotton February 2015 August 2015 November 2015 February

13 Decline in 2015 animal and product receipt forecasts broad based, but largely due to cattle/calves $ billion Cattle and calves Dairy Broilers All other poultry F= Forecast Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9th, F February 2015 August 2015 November 2015 February F 13

14 Farm Sector Balance Sheet Outlook

15 Farm real estate* represents the majority of the sector s assets 15

16 Forecast drop in net cash income drives lower farm real estate values* 16

17 Drop in 2016F farm real estate assets drive change in total assets Percent change Total assets Real estate assets* % decline in real estate assets* from 2015F to 2016F F F= Forecast. *Real estate includes the value of land and buildings Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9,

18 Farm real estate and nonreal estate debt approaching historic levels $ billion (2009 Dollars) Real estate debt 100 Nonreal estate debt F F= Forecast. Values are adjusted using the chain-type GDP deflator, 2009=100. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9,

19 But below the late 70s early 80s peak in inflation-adjusted terms $ billion (2009 Dollars) Real estate debt 100 Nonreal estate debt F F= Forecast. Values are adjusted using the chain-type GDP deflator, 2009=100. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9,

20 Farm debt is forecast to grow rapidly from 2013 to

21 Leverage increased since 2012, but remains low relative to historic levels 21

22 Rate of return on farm assets (ROA) expected to remain flat in Rate of return on assets from income F F = forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9,

23 Rate of return on farm assets (ROA) expected to remain flat in Rate of return on assets from income F F = forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9, Decomposing the rate of return on farm assets (ROA) ROA = Asset Turnover Ratio Profit Margin Ratio Value of production that assets generate Profit margin on value of production 23

24 Rate of return on farm assets (ROA) expected to remain flat in Rate of return on assets from income F F = forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9, Decomposing the rate of return on farm assets (ROA) ROA = Asset Turnover Ratio Profit Margin Ratio Value of production that assets generate Profit margin on value of production 24

25 Lower profit margins drive decline in ROA from 2013 to Rate of return on assets from income F 0.19 Asset Turnover Ratio Operating profit margin ratio F F = forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9,

26 Lower profit margin ratio in 2015 and 2016 consistent with other low income years Asset Turnover Ratio Operating profit margin ratio F F = forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9,

27 Farm Business Outlook

Farm businesses account for 45% of farms, but over 90% of production Operators report they are retired or have a major occupation other than farming.

28 Farm businesses account for 45% of farms, but over 90% of production Operators report they are retired or have a major occupation other than farming. Gross cash farm income less than $350,000 and operators report farming as their major occupation. Farm Businesses Residence Intermediate Commercial Gross cash farm income greater than $350,000 and farms organized as nonfamily corporations or cooperatives. Source: 2014 Agricultural Resource Management Survey (ARMS) 28

29 Average net cash income up for most crop farm businesses 1/ F 2016F 29

30 Average net cash income expected to fall for most farm businesses specializing in animals and products 1/ F 2016F 30

31 All Farm Businesses $87,700 in

32 Share of highly leveraged crop farm businesses increased substantially since 2011 Percent of farm businesses 10% Crops 8% 6.1% 5% 5.0% 3% 0% F D/A (41-70) D/A (71 +) F = forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9,

33 Share of highly leveraged animal and product farm businesses also trending upward since 2011 Percent of farm businesses 10% Animals and products 8% 5% 5.4% 3% 3.4% 0% F D/A (41-70) D/A (71 +) F = forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9,

34 Presentation takeaways Net cash income expected down slightly in 2016, but relatively flat from Large declines in net cash income since 2013 are driven by lower crop receipts paired with increasing expenses. Lower income is expected to put modest downward pressure on farm real estate asset values. Changes in farm real estate asset values drive changes in total farm assets. Farm debt, particularly nonreal estate debt, has grown rapidly since Inflation-adjusted debt nearing historic highs, but remains below 1970s-1980s peak. Financial metrics indicate the farm sector remains in good standing. An increasing but small group of farms is highly leveraged. 34

Additional analysis and data Farm Sector Income and Wealth Statistics Data product updated 3 times per year. Next update: August 30th, 2016.

35 Additional analysis and data Farm Sector Income and Wealth Statistics Data product updated 3 times per year. Next update: August 30th, Historical State Estimates Historical National Estimates National Forecasts 35

Explore the data Visualizations let you dive into

State Digging into the Farm Balance Sheet Farm

36 Explore the data Visualizations let you dive into the financials of the farm sector Get to Know Your State Digging into the Farm Balance Sheet Farm Income Atlas 36

37 QUESTIONS? Ryan Kuhns Kevin Patrick Farm Income Team 37

An Agricultural Update

An Agricultural Update May 22, 2018 Indianapolis, IN David Oppedahl Senior Business Economist 312-322-6122 david.oppedahl@chi.frb.org Personal consumption shares 40% 30% 20% 10% 0% 1950 1960 1970 1980